Buying a business from a landlord’s premises can become difficult when the business sale and the commercial lease do not move together. You may agree a price for the business, arrange funding and prepare for completion, only to discover that the landlord has not approved you as the new tenant.
The premises may be essential to the business you are buying. A café needs its kitchen and customer location. A shop may depend on passing trade. A warehouse business may rely on its storage space and delivery access.
Without the legal right to occupy the property, you may own the business but have nowhere from which to operate it.
In This Article
You are not buying the premises
When a business operates from rented property, buying the business does not usually mean buying the building.
You may be purchasing its equipment, stock, goodwill, customer relationships and trading operation. The premises remain owned by the landlord.
Your right to trade from the property must therefore be dealt with separately.
In an asset purchase, this commonly means taking an assignment of the seller’s existing lease or negotiating a new lease directly with the landlord. An assignment transfers the existing tenant’s lease to the incoming tenant.
The business purchase and property arrangements need to complete in a coordinated way. Otherwise, you could become responsible for the business before you have secured the premises it needs.
The existing lease may not be suitable for you
A buyer may assume that taking over the seller’s lease means continuing on the same basis as the seller.
That assumption can hide several problems.
The lease may have only a short time left to run. It may contain rent review provisions that could increase the rent soon after completion. The permitted use may not cover your business plans. It may also place wider repair, insurance and service charge obligations on the tenant than you expected.
An assignment normally transfers the existing lease rather than giving you an opportunity to rewrite it. You take the remaining term with its existing rights, restrictions and responsibilities.
This can be a problem where your plans differ from those of the seller.
For example, you may want to change the services offered, extend trading hours, install new equipment or alter the layout. The lease may restrict these changes or require further landlord consent.
The commercial value of the business should therefore be considered alongside the terms of the property it depends on.
The landlord may not accept you as the tenant
Most commercial leases contain restrictions on assignment or underletting without the landlord’s consent. HM Land Registry guidance notes that breaching such a restriction may have serious consequences where the lease contains an applicable forfeiture clause.
The landlord is not simply approving the business sale. They are deciding whether to accept you as the person responsible for the rent and lease obligations.
They may consider your:
- Financial standing
- Business experience
- Funding arrangements
- Proposed use of the property
- Trading history
- Ability to meet the lease obligations
A landlord may ask for accounts, references, forecasts or a business plan before making a decision.
This can create difficulty where you are purchasing through a new company with little financial history. Even where the business itself has traded successfully, your buying company may not have evidence showing that it can meet the rent.
The landlord may then request a personal guarantee, company guarantee, rent deposit or other form of security. Government guidance confirms that landlords may ask an outgoing tenant to guarantee the new leaseholder when a commercial lease is passed on.
These requirements can add to the amount you need to fund before completion.
An informal agreement may not be enough
The seller may tell you that the landlord is happy with the sale. The landlord may even have spoken positively about you taking over.
That does not necessarily mean formal consent has been granted.
The lease may require consent through a document known as a licence to assign. This records the landlord’s approval and the conditions attached to it.
The licence may need to be agreed by the landlord, seller, buyer and any guarantor. The lease assignment is then completed through a separate deed.
Until these documents are completed, you may not have the legal right to occupy as the tenant.
Relying on an informal conversation can therefore leave you exposed. You should know exactly what consent is required and whether all conditions have been satisfied before completing the business purchase.
You could inherit expensive repair obligations
The physical condition of the premises can create one of the largest unexpected costs.
A commercial lease may require the tenant to repair and maintain the property. Depending on the wording, this can include putting the property into repair even where it was already in poor condition when you took over.
The seller may have accepted those obligations years earlier. That does not mean the premises now meet the required standard.
After assignment, you could become responsible for issues such as:
- A leaking roof
- Damaged flooring
- Old electrical installations
- Deteriorating windows
- Poor decoration
- Structural or drainage concerns
The landlord may also require the tenant to remove alterations and return the premises to an earlier condition when the lease ends.
A business can appear profitable while carrying a significant future property liability. Reviewing the lease without considering the building’s condition may give you only part of the picture.
A property survey may help you understand whether the condition of the premises matches the obligations you are being asked to accept.
The seller may have altered the property without consent
Businesses often change their premises over time.
The seller may have installed counters, signage, kitchen extraction, internal walls, air conditioning or specialist equipment. Some of these works may have required the landlord’s written consent.
If the correct licence for alterations was never obtained, the landlord may raise the issue when considering the assignment.
The landlord could require the seller to regularise the works, remove them or provide further information before approving you as the new tenant.
This can delay completion. It can also create disagreement about who should pay for the work.
As the buyer, you need to know whether the premises match the approved plans and whether you will inherit any reinstatement obligations.
The permitted use may not cover your plans
A lease normally describes how the premises may be used.
The seller’s current trading activity may fall within that wording, but your intended use might not.
You may be buying a café but want to expand into evening dining. You may be taking over a retail unit but want to add online fulfilment or another service. Even a small change to the business model may raise lease, planning, licensing or regulatory questions.
Landlord consent does not automatically replace any separate planning permission, licence or regulatory approval that may be required.
A strong customer base and attractive location will not help if you cannot lawfully operate the business as planned.
The permitted use should therefore be checked against your actual business plan rather than the seller’s current activities alone.
A short lease can weaken the value of the business
The remaining lease term can affect whether the purchase makes commercial sense.
You may be paying for the business’s established location, but the lease could have only a short time left. If you cannot remain after it expires, some of the goodwill you are purchasing may be lost.
A short lease can also affect funding. A lender may be concerned if the business depends on premises that are not secured for long enough to support the loan.
You may ask the landlord for an extension or a new lease. However, the landlord is not required to offer the same rent or terms.
They may propose a higher rent, a new deposit, revised repair obligations or different restrictions. Negotiating these points can make the transaction longer and change its overall cost.
You should also understand whether the lease has security of tenure under Part II of the Landlord and Tenant Act 1954. Where the legislation applies, a qualifying business tenant may have statutory renewal rights. The position depends on the tenancy and whether those rights were properly excluded.
Rent and service charge costs may be higher than expected
The advertised rent is not always the full cost of occupying commercial premises.
You may also need to pay service charges, building insurance contributions, business rates, utilities and other property costs.
Service charges can vary. A later balancing payment may become due after the landlord calculates the actual cost of services for the year.
There may also be major works planned for the building. If the lease allows the landlord to recover those costs through the service charge, you could face a large payment after taking over.
A rent review may create further uncertainty. The rent could change shortly after completion or be reviewed retrospectively from an earlier date.
The purchase documents should clarify how rent, service charges and other property payments will be divided between you and the seller. The lease information should also show whether any sums remain outstanding.
Existing breaches may delay landlord consent
A landlord may be unwilling to approve the assignment while the seller is in breach of the lease.
The problem could involve rent arrears, unpaid service charges, disrepair, unauthorised alterations or use of the property outside the permitted purpose.
You may not have caused the breach, but it can still affect your purchase.
The seller may need to settle the arrears or resolve the issue before the landlord will consent. If this is discovered late, the expected completion date may no longer be realistic.
The business purchase agreement should make clear that you are not taking responsibility for the seller’s earlier breaches unless this has been expressly agreed and reflected in the transaction.
The rent deposit may need to be paid again
The seller may have paid a rent deposit when entering the lease. You should not assume that the same money will automatically remain in place for your benefit.
The landlord may return the seller’s deposit and require you to provide a new one. The amount may also change if the landlord considers you a greater financial risk or if the rent has increased.
This can create an unexpected funding requirement shortly before completion.
The existing rent deposit deed must be reviewed to understand when the seller’s money can be released and what conditions apply. The licence to assign and business purchase agreement should then explain how the old and new deposits will be handled.
The seller may remain connected through a guarantee
The landlord may require the seller to enter into an authorised guarantee agreement, often called an AGA.
Under an AGA, the outgoing tenant guarantees certain lease obligations of the incoming tenant. The statutory framework appears in section 16 of the Landlord and Tenant (Covenants) Act 1995.
This may concern the seller because they could remain exposed if you fail to pay rent or comply with the lease.
The seller may therefore ask you to provide an indemnity under the business purchase agreement. That could require you to reimburse the seller if the landlord makes a valid claim against them.
This creates an ongoing relationship between buyer and seller after completion. Both parties need to understand what is being guaranteed and how long that exposure may last.
Tax and registration can add further work
Taking an assignment of a lease may create Stamp Duty Land Tax obligations in England and Northern Ireland.
HMRC states that where the new owner pays a lump sum for the assignment, SDLT may be payable on that amount. The position depends on the consideration and the circumstances of the transaction.
The allocation of the business purchase price may therefore matter. The total price may cover goodwill, equipment, stock and the leasehold interest.
The assignment may also need to be registered with HM Land Registry, depending on the lease and remaining term. Restrictions on the property title may require evidence of landlord consent before registration can be completed.
These are not matters to leave until after the buyer has taken possession.
Completing the purchase before the lease can leave you exposed
The greatest risk is a gap between buying the business and obtaining the right to occupy the premises.
You might pay the purchase price and take ownership of the assets, but still be unable to operate from the property. The seller may remain the legal tenant while you occupy without a completed assignment.
This can create uncertainty about rent, insurance, damage and responsibility for the premises. It may also place the seller in breach of the lease.
The business purchase agreement should normally connect completion to the property arrangements. It should address what happens if the landlord refuses consent, delays its decision or imposes conditions that cannot be met.
A buyer should not rely on the idea that the lease can be sorted out after the sale.
The business price may not reflect the property risk
A profitable business can still be a poor purchase if its premises are unsuitable or insecure.
The accounts may show strong trading performance, but they do not tell you:
- Whether the rent is about to rise
- Whether major repairs are needed
- Whether the lease will expire soon
- Whether the landlord will accept you
- Whether your planned use is permitted
- Whether major service charge works are expected
These matters can affect both future profit and the amount the business is worth to you.
The lease should be considered during commercial negotiations, not after the price has been treated as final.
A shorter term, higher deposit or substantial repair liability may justify revisiting the transaction terms.
Understand the premises before you commit
Buying a business from a landlord’s premises means you are taking on two connected arrangements.
The first is the purchase of the business. The second is the legal right to occupy the property from which it trades.
The deal can go wrong when the buyer focuses on turnover, customers and equipment but treats the lease as standard paperwork.
Before committing, you need to understand whether the landlord will accept you, whether the lease supports your plans and what costs or liabilities come with the premises.
This reflects the central concern in Onyx Solicitors’ approved buyer strategy: business owners want to understand what they are signing and what may affect them before committing.
Send the business purchase details, lease and any proposed completion date to your solicitor early. The property and business documents can then be reviewed together.
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Contact us today at 0121 268 3208 or via email at info@onyxsolicitors.com for a FREE consultation. Let us help you achieve the peace of mind that comes with having expert legal support on your side.
